We were asked by a client recently if he wanted to finance his seniors housing community today and lock in a high rate for the next three decades. We have listed the reasons below for many seniors housing owners.
HUD’s fiscal years run from October 1 through September 30 like all federal agencies. Between Fiscal Year 2010 and Fiscal Year 2022 the HUD232, or “Lean program”, as it is commonly known, has funded on average $3.75 trillion worth of senior housing loans. This volume included new construction loans, acquisition loans, and refinance loans.
Since more than 20 years, the Lean program has been a key part of seniors housing financing. Senior housing loans were originally processed by multifamily field offices using either the TAP (Traditional Application Processing model) or the more popular MAP (Multifamily Accelerated Processing model).
HUD decided to create the Lean program in 2008, loosely based upon Toyota’s Lean manufacturing model. Although HUD’s MAP program had reduced the processing time for loan application processing compared to the TAP program, a team made up of HUD professionals from all levels and professions believed that they could improve the execution of healthcare loans and seniors housing loans by incorporating Lean principles.
The Lean model was faced with challenges in its first few years, including the credit crunch of 2008 to 2010, but the founders of the Lean program persevered until they created the program we know today. The Lean program finances skilled nursing and assisted living, memory care communities, and independent living (upto 25% of the total units).
Between 2018 and 2022, Lean rates were locked in the 2.50%-4.00% range. These rates are now the norm for a new generation HUD borrowers and lenders. The database of HUD Active Insured Mortgages reveals that Lean loans were closed in the 2000s at rates ranging from 5.00% up to 7.50%. Rates currently hover around 5.65%, with the.65% Mortgage Insurance Premium (“MIP”) HUD receives as part of its non-recourse loan guarantee.
Even today’s interest rates are lower than the historical average. It is still a low interest rate compared to other seniors housing loan products on the market today. HUD borrowers can get leverage up to 80% compared to other loan products which top off at 65% or less.
The HUD LEAN product has a few additional benefits, including:
* A 35-year term with an amortization period.
* Non-recourse, except for standard “bad-act” carve-outs
* Flexible prepayment schedules.
Yes, we used two words that aren’t normally used in the same sentence: HUD and flexible. HUD offers a declining penalty for prepayment, unlike other loan products. The standard schedule starts at 10% and decreases by 1% each year. The loan is fully pre-payable at the end of 10 years.
A borrower might ask, “What if my community is sold in year six?”. HUD is flexible in these cases. It allows borrowers and lenders to create pre-payment penalties that are more in line with their needs. A borrower may be able to get a prepayment penalty that includes five years at 10% prepayment penalty, followed by five years at 1% prepayment penalties. This penalty is available in exchange for a slightly higher interest rate. This is only one option that HUD offers to accommodate future sales. There are many other options.
Let’s return to the client’s question. Why would a borrower want a loan to finance a community that uses HUD Lean today. Timing is the first thing to consider. In the past five years, we have answered 30-40 projects when you asked us how long the queue took. The HUD Lean queue has only 15 deals as of February!
This is the shortest queue since Lean’s inception. Lean processes four loans per week on average, which is a wait time of one month. This is much shorter than the wait times of upto a year in early Lean processing. However, as rates settle lower, the queue will grow and the wait time will increase.
HUD is a popular choice for many borrowers today because they lock in a higher rate of interest for a longer time. HUD offers programs to address these concerns. HUD offers two programs to help borrowers lower their interest rates: the Lean 223 (a)(7) refinance program and the Interest Rate Reduction Program (IRR) modification program.
Any Lean-approved lender can process the 223(a(7) refinance loan, while the IRR modification loan must be handled by the current HUD lender. Both can be used to reduce your interest rate quickly and easily. With the 223(a(7) program, borrowers may be able extend the term of their loans, borrow more funds for improvements, or refinance existing debt.
Lean recently adopted the Green MIP Program. This program allows borrowers the ability to lower HUD’s MIP rate to just 0.255% annually. This is a decrease of 0.40% for a 223(f), refinance, and more than 0.50% for a new construction transaction. This program is for borrowers who have achieved a HUD-approved green standard in their community or borrowers who plan to implement energy-saving measures to attain a green certification.
HUD allows you to refinance your community, and include the cost for these measures in your loan amount. These changes can be implemented for 12 months after closing, but your reduced MIP begins at loan close. Although there are some costs associated with the Green MIP, the significant decrease in annual MIP cost should result in a very quick return on investment. This is not only a win-win for HUD borrowers with lower rates, but also a win-win for the environment.
Lean underwriting standards have increased, as have most lenders and loan programs in our industry. Lean expects an experienced owner/operator and a strong trailing-12 income statement to support the loan amount at 1.45x debt service coverage or higher. If you meet these requirements, HUD might be a great option for your next project. You might be able to start the HUD process today with an experienced HUD Lean lender.
Senior vice presidents Christopher Fenton, Corley Audorff, are focusing on seniors housing at Colliers Mortgage.